Tax credit bubble pops; May housing sales collapse

AP today reports record weakness in the housing market:

Sales of new homes collapsed in May, sinking 33 percent to the lowest level on record as potential buyers stopped shopping for homes once they could no longer receive government tax credits.

The tax credit caused a temporary bubble in housing prices, during which buyers paid too much for real estate. Recent buyers must now ask themselves if the tax savings outweighed the amount of their overpayment in price.

The price drops were broken down by region. AP reported a 33% drop in the Northeast from April's levels.

Click here for my thoughts on the real estate tax credit in October 2009.

Deflation and gasoline prices.

This article indicates that the U.S. money supply has declined rapidly in recent months, despite runaway government spending.

How this could happen would be the subject of a full length textbook. Suffice it to say that the money supply is composed of many elements, including bank loans. When credit is tight, the money supply gets smaller, regardless of government spending.

A major indicator of the direction of inflation is the price of gasoline. The price of gasoline fell during and immediately before Memorial Day weekend. The price has not moved back up since then. It is unusual for gasoline prices to fall before and during a summer holiday. It is unusual for any prices to fall during a period of runaway government spending.

It is possible that the credit bubble that begin its collapse around 2007 is still collapsing - that the government stimulus bill (and related spending) is merely delaying the collapse. If that is true, the deflation we are experiencing is, ultimately, a good thing. The economy will not turn around until prices get to where they are going, even though the ride down will be painful.

If this scenario is allowed to play out, it would mean lower prices for real estate (accompanied by pain, foreclosures, bankruptcy, etc.), but, ultimately, an increase in sales at the new lower price levels.

Harrisburg; statistics on abandoned and condemned buildings

I wrote earlier about Harrisburg's use of the National Guard to board up abandoned houses in the City.

The same news story that discussed the National Guard operation also revealed interesting information about the state of housing in Harrisburg.

Harrisburg apparently contains the following:

• 1,500 abandoned buildings
• 835 of which have been condemned by the City
• 324 of those buildings are scheduled to be torn down
  

(The National Guard boarded up 15 homes last week).

I know from prior discussions that the City owns roughly 500 properties that could not be sold at various prior tax sales. These buildings now suffer from title defects that hinder any potential sale. I do not know whether any of the abandoned and condemned buildings are included in the 500 city-owned properties.

The destruction of large numbers of abandoned buildings sounds like a small scale version of what is happening in Detroit. No plans have been announced to convert large areas of Harrisburg to agriculture.

Harrisburg uses National Guard to board up houses; Clean and Seal; South 15th Street

The following story from WHP tv-21 attracted some attention this week in Central Pennsylvania:

The 400 block of Harrisburg's S. 15th Street looks like a war zone. And that was before the five-ton truck pulled up onto the curb Tuesday, and several uniformed Pennsylvania National Guardsmen got out.

The City and the National Guard are engaged in a:

. . . joint effort to board up abandoned buildings to prevent children and drug dealers from getting inside. The Guard runs a Counter Drug Program that features a "Clean and Seal" team. That is who will be hard at work on the streets of Harrisburg in the coming days.

First Sergeant Sean Whelan told CBS 21 News that his people will be in the city through Friday, boarding up at least 15 vacant structures.

This program does not address the more fundamental problems that have prevented the real estate in question from achieving its maximam potential, such as title defects resulting from prior tax sales. We will explore those issues in future posts.

Detroit's consolidation moves forward - large areas to be demolished - urban planners watch and wait.

I have written previously on the City of Detroit's plan to downsize by abandoning large portions of the city and consolidating into a smaller area, with hopes to convert the abandoned real estate to agricultural uses.

Detroit has taken another step in this process by announcing plans to demolish 3,000 homes this summer (as part of a larger goal to demolish 10,000 homes in the mayor's first term). That the consolitation is proceeding with such major steps should interest urban observers everywhere, including those in Pennsylvania's cities. Detroit differs from Pennsylvania only by degree.

Philadelphia property tax increase.

The Philadelphia City Council has approved a 9.9% hike in property taxes, together with increases in trash fees. This will have the usual dampening effect on real estate values in the City. As costs increase (especially taxes), net operating income declines and sale prices decline. On the bright side, with comparable sales numbers declining, those owners who manage to hang on to their properties will have a better chance at challenging their tax assessments.

The tax hike awaits final approval next week.

NBCPhiladelphia.com reports that the tax hike is supposed to be "temporary" - lasting only two years. But do not count on this tax increase going away, regardless of how they characterize it now.

Commercial real estate mortgage backed securities; Yields fall and prices rise despite decline in commercial real estate values.

Richard Daughty summarizes the problems plaguing commercial real estate right now:

. . . . [W]e are still left with the problem of the sheer tonnage of what I do not know about commercial property, except that after being overpriced for years, commercial property is said to be in a tailspin, which I assume is because people aren't buying things with that legendary American "abandon and stupidity to excess" because they finally, after bingeing for years on accumulating debt, continual government deficit-spending and the Federal Reserve creating more and more money to finance the whole deal, now owe So Freaking Much (SFM) that they can't make ends meet, and are in no mood to spend more borrowed money, meaning that businesses are closing up shop for lack of customers, leaving the commercial property owner left with bittersweet memories, a few bad checks and more vacancies.

May 1, 2010 - "Trickle of Nonsense"

Daughty's latest column expresses concern that investors are buying securities backed by commercial mortgages to such an increased extent that yields have fallen. The mortgages can be only as safe an investment as the underlying commercial real estate.